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Isla Training Center: product differentiation in a price-competitive market.

CASE DESCRIPTION

The primary subject matter of this case is product differentiation in a relatively price-competitive market. In particular, this case highlights different elements that business owners use to differentiate their products, especially when they face constraints in bringing their business costs down, which prevents them from engaging in direct, price competition. This case has a difficulty level of three and up, appropriate for junior level and beyond. The case is designed to be taught in two to three class hours in a management, managerial economics, or an entrepreneurship course, and is expected to require about three hours of outside preparation for students, consisting mainly of reading the case and familiarizing themselves with the business environments on the U.S. territory of Guam in the Western Pacific region.

CASE SYNOPSIS

The case is about Isla Training Center, a strategic business unit of the Guam-based small business named Tax Shelter, Inc. that provides training services in computer applications. The case traces through the creation of the Isla Training Center in response to a request for proposal from a U.S. Federal agency and the business decisions that had to be made when Federal funding was terminated. Consequently, Isla had to reorient its business operation from originally serving a "captive" market of public sector clientele to entering a relatively competitive market of private sector customers. As such, Isla had to differentiate itself from its competitors by focusing on its better quality products and customer service, which is tantamount to transforming itself to a monopolistically competitive firm.

INTRODUCTION

The Tax Shelter, Inc. is a small accounting firm offering accounting and tax preparation services and business consulting services since 2000. It is located on Guam, a U.S. territory in the Western Pacific. It is a customer-oriented organization that focuses on its clients' needs in the accounting and finance and plays a consultant role to help its clients to achieve their specific goals. It has three Strategic Business Units: tax preparation, business consulting, and computer training services. This case focuses on the creation of its computer training services unit, Isla Training Center.

The business owners' decision to open Isla Training Center (Isla, henceforth) was made in 2006 in response to a Request for Proposal (RFP) advertised by a government agency. It was going to serve the training needs of those employed in the government sector. The Tax Shelter submitted a proposal and was awarded a contract for six months. The contract expired the end of 2006 and another RFP was in process for the subsequent fiscal year. A new contract was signed in June 2007 but deemed illegal due to improper procurement procedures made by the government agency. This resulted in delays in the contract process, a waiting period during which Isla continued to incur fixed costs. It was at this time that the owners of Isla had to reorient its business operation from originally serving a "captive" market of public sector clientele to entering a relatively competitive market of private sector customers.

BUSINESS ENVIRONMENT

Market Overview

Computer training services is a developing market on Guam. Even though the industry's growth rate has not been surveyed, the increasing competitors prove that the market is growing. The market started off in the tourism sector where tourism businesses focused on its employees' computer literacy as a way to improve its customer service and to attract affluent tourists to visit Guam. Since then, other businesses and government agencies followed suit and began focusing on hiring well-educated and skilled employees. Consequently, the demand for training programs has increased. Meanwhile, to enter the market of computer training services does not require strong backgrounds or support, such as huge capital or high technology. Guam's relatively small population from which to draw prospective customers, combined with low barriers to enter the market, have created a relatively competitive market where pricing strategies are important.

Prospective Customers

Customers include those who work in the public and private sector, as well as individuals. The public sector includes agencies that usually set aside a budget for training and other professional development. Some agencies are mandated to provide training services for their clients. To improve the efficiency and effectiveness, the public sector often imports the experiences of private businesses via outsourcing consultants. In addition, the people network on Guam is powerful and effective. Word of mouth deeply influences the public sector's decisions where its trainings are held. Those who have worked in the public sector are the key people who influence those decisions.

Each government agency sets aside a budget for staff development according to their annual allotment and number of personnel. Most agencies that do have funds for staff development are either autonomous or receive a large portion of federal funds. The agencies with local funds are limited to a small portion for staff development which varies between agencies. For example, one agency is 90% federally funded and 10% locally funded. Because of the high percentage of federal funds and high level of support from the grantor agency, it is able to allot about $250,000 to $300,000 annually for off-island and on-island training. This amount is for about 60 staff of the agency for certification training not offered on island. In addition, this agency identifies funding for staff to participate in training on island in areas such as computer, personnel, and procurement.

Another agency, for example, has very limited funding for training as most of the funds come from the general coffers. As such, its staff rely on the small amounts of federal funds it receives in order to attend training. Staff development appears to be not a top priority for the Government of Guam because of the tight fiscal constraints it has been facing in recent years. Because of this, each agency or department must identify other sources of funding for training.

In the private sector, big businesses usually have their own training department, although many of them have begun to find using an outside training provider to be more cost-effective. Most of medium and small businesses do not have their own in-house training systems, partly because training is not a top priority in their resource allocation. However, they are aware that lack of training can be a hindrance to their growth and to enhance their competitiveness. face a bottleneck of growth, they know that training is the key to expansion. In addition, some start-up businesses invest in training to position themselves well in their competitive market.

At the individual's level, the common motivation for participating in training programs is personal or professional enrichments, with examples of the latter to include seeking either promotions in their workplaces or better opportunities in other companies. Some are also preparing themselves to be business owners.

Competitors

The three major competitors on Guam who provide similar services consist of the professional development center of a public university and two private businesses. In this paper, these competitors will be referred to as Competitors 1, 2 and 3, respectively. There are two other private businesses that provide similar services but are not considered to be a direct competitor to Isla.

Competitor 1 provides Microsoft Office training but does not provide Quickbooks training. It also caters mainly to the public sector. Competitor 2 provides Quickbooks training but does not provide Microsoft Training. Both Competitors 2 and 3 cater to the private sector and individuals. While Competitor 1 advertises mainly through its website, it is not known how Competitors 2 and 3 reach their target market. Isla's and its competitors' profiles are summarized in Table 1.

As one can see in Table 1, Isla's price is the highest among all computer training providers. Comparatively, its price is 65% higher than Competitor 1's price, 24% higher than Competitor 2's price, and 230% than Competitor 3's price (note that Competitor 3's price does not appear to compare well with other competitors' prices).

Although the computer training market on Guam does not fit the standard purely competitive market definition, especially the part about having a large number of independent, price-taking sellers, the small size of the Guam market relative to the number of training centers creates a business environment that is fiercely competitive. In this type of environment, a business can adopt one of two strategies. One strategy is to become the low-price competitor, which would usually require keeping the business' costs down, perhaps in combination with other measures to keep its price low. Another strategy is to not compete directly in terms of price but instead to differentiate its products by convincing prospective customers that its products are better than those of its competitors. In doing so, the business is in effect removing itself from a purely competitive environment to a monopolistically competitive environment.

Isla has to adopt the latter strategy because it is unable to bring its costs down and thus must set its prices higher than those of its competitors'. In determining its price, the owners of Isla considered its costs, both fixed and variable. Focusing only on accounting or explicit costs and ignoring implicit or opportunity costs, Isla breaks even when it charges a price of $350 per customer to a minimum of 24 customers per month. Worse yet, if implicit or opportunity costs were included, owners have to charge an extra $172 per customer or attract more customers. (These implicit or opportunity costs include the interest income owners had to forgo to use their own savings to start up the business and the employment income that one of the owners had to forgo to run the business on a full-time basis.)

PRODUCT DIFFERENTIATION STRATEGY

As stated in the previous section, Isla has had to adopt the strategy of product differentiation as it is unable to compete on the basis of direct, price competition. Instead, it must convince its prospective customers that some aspect of its product (that is, computer training services) is better than its competitors. Marginal analysis provides a theoretical guideline for how this is done: customers would be willing to pay a higher price (a cost to them) if the quality or some other positive attributes of the product (which are benefits to the customer) are proportionately higher. In Isla's case, if its price is x% higher than its competitor's price, then its products must be at least x% better, at least as perceived by prospective customers, than those of its competitors. Expressed differently, Isla can compete even with its higher price as long as it is perceived to offer prospective customers with a better value, that is, more benefits for what customers paid compared to what the competitors offer. In reality, the benefits are difficult to measure and hence comparison of Isla's product with those of Competitors 1 and 2 cannot be performed. Nonetheless, the general rule of marginal analysis still applies in a qualitative sense.

Also, different elements of Isla's product differentiation strategy are discussed. The centerpiece of Isla's strategy to differentiate itself from its competitors is to showcase itself as a customer-oriented company offering quality training services that, when compared to Isla's competitors, more than justify Isla's higher price. Isla meets this mission by having certified and reputable instructors and staff, quality materials, latest technology, and excellent customer service.

Qualified, Reputable and Well-Connected Staff

The key people involved in Isla are shown in table 2. These individuals have the educational and professional background and expertise to provide quality computer training services. Isla's management is committed to ensuring that those who take the courses are completely satisfied with the content, customer service, and overall environment. The management is also positioned to meet the future needs for the growth of the company. Currently, the company has a major weakness in the lack of marketing and sales expertise , which is viewed as a potential obstacle for the company's future growth prospects. The management at Isla is looking for ways to address this weakness.

Not only are the members of the management and instructional staff qualified, they have also built a good reputation in the community and are well-connected in a market that is highly personal. Guam's small business culture is somewhat unique in that the island is small and many owners and/or managers are either related or went to school with one another. Because of this personal relationship, small business owners and/or managers tend to seek out each other's services. Business owners have developed personal relationships over the years. There is a level of trust already developed from these relationships which extends to doing business with one another. There is also a positive level of competition between the businesses in that the owners and/or managers work harder to be competitive although usually not directly with each other as their areas of expertise are different.

Latest Technology and Quality Course Materials

Isla is both market- and technology-driven which means the training materials and computer hardware must be up-to-date. For example, software programs are updated constantly, such as the recent release of Microsoft Office 2007 and Quickbooks 2007. These programs were recently introduced to the market which means that Isla must incorporate these programs into its curriculum. The management understands how important it is to stay current and, as such, constantly considers the best timing, cost, and expected revenue to update new released computer software and hardware. Staying current and adopting updates as they become available is one way that Isla differentiates itself from its competitors, knowing too well that updating too often will drive up its costs and reduce profits. Yet, updating too slowly or belatedly will push its clients away towards its competitors.

Excellent Customer Service

Isla prides itself of providing excellent customer service through reliability, flexibility, convenience, trustworthiness and integrity. To meet their customers' needs, Isla staff consists of two instructors and one training coordinator (as presented in Table 2). One of the instructors is in charge of scheduling the training sessions and works with the training coordinator to ensure that training materials are prepared prior to the training sessions. Although the instructors are available only during instruction and lab times, the training coordinator is available full time, maintaining the training facility and attends to customer's needs during business hours. The instructors are usually notified within 48 hours of the training and are always available for the course.

Another distinctive feature of Isla's service is that it offers two hours of lab time with instructors at no additional charge.

FINANCIAL POSITION

It is too soon to evaluate the success of Isla's business strategy of product differentiation. Limited data for the period between June and December 2007 show that the business generated a loss, in both accounting and economic sense.

Isla's revenues increased noticeably from approximately $ 30,000 and $ 95,000 in 2004 and 2005, respectively, to almost $300,000 in 2006. Much of its 2006 revenue was re-invested to expand the training center. Between January and June 2007, Isla's revenue was minimal as it waited for the renewal of its contract with a federal government agency, only for the new contract to be deemed illegal due to improper procurement procedures made by the government agency. To pay for its business costs, many of which were fixed, Isla decided to tap into private sector clientele, yielding an estimated revenue of $60,000 between June and December 2007, or $8,571 per month.

For the period June-December 2007, Isla incurred the following costs, divided into explicit and implicit costs (see Table 3):

Among the implicit costs are the opportunity costs of using the business owners' savings of $16,000 to set up Isla, in this case, interest earnings at 5% per year. Another opportunity cost arises from the decision by the training coordinator to give up her position as a career government employee (earning $49,000 per year) to work at Isla on a full-time basis. Of course, there are advantages to working at the training center instead of a government agency, including the greater flexibility to do other things when no training classes are taking place. While she stays in the facility to respond to customer's inquiries, she also can use the time to pursue activities aimed at professional and personal enrichment.

Based on the revenue and cost data for the period June-December 2007, Isla posted a monthly accounting loss of $ 875 and a monthly economic loss of $5,024.67.

DISCUSSION QUESTIONS

1. Isla Training Center was added to the Tax Shelter, Inc. as a strategic business unit in 2006. Explain what motivated this business decision. Expand on your answer by describing the risks associated with this or similar business decision(s).

2. Explain the difference in accounting and economic profits in general and those reported by Isla during the June-December 2007 period.

3. From the title of the case, explain how the strategy of product differentiation is equivalent to creating some type of monopoly, and explain what strategies Isla Training Center used to differentiate its product from those offered by its competitors.

REFERENCES

Paulino, Sandra (2008). Isla Training Center: A Strategic Business Unit of Tax Shelter, Inc., unpublished manuscript.

Reed, P. (1992). Marketing Planning and Strategy. Sydney: Harcourt Brace.

Thomas, Christopher R. & S. Charles Maurice (2008), Managerial Economics, 9th Edition, McGraw Hill.

Maria Claret M. Ruane, University of Guam

Sandra Paulino, University of Guam
Table 1: Isla and Other Computer Training Centers on Guam

                  Isla Training Center    Competitor 1

Private/Public    Private                 Public

Location          Harmon. Guam            Manailao. Guam

Products/         Microsoft Office and    Microsoft Office
Services          Quickbooks Training     Training

Prices            $350 for MS Office      $150 for 8 Hours
                  course (12 hours) and   $100 for 4 Hours
                  $400 for Quickbooks
                  course (12 hours)

Course Duration   12 Hours each course    8 Hours each course
                                          4 Hours each course

Price per hour    $29.17 to $33.33        $18.75

Lab Capacity      12 Clients              20 Clients

                  Competitor 2          Competitor 3

Private/Public    Private               Private

Location          Hagatna. Guam         Harmon. Guam

Products/         Quickbooks Training   Microsoft Office and
Services                                Quickbooks Training

Prices            $950 for 3 months     $225 for 8 weeks

Course Duration   3 Hours/week          3 Hours/week

Price per hour    $24.36                $9.38

Lab Capacity      16 Clients            10 Clients

Table 2: Management and Instructional Team of the Isla Training Center

Name                                 Work Experience

James Paulino,         * One year as Accountant with Triple J
Instructor               Enterprises. 1987
                       * Two years as Assistant Buyer with Duty
                         Free Shoppers, 1987-1989
                       * 13 Years as a Planner and Asst. to
                         Controller with the Guam Waterworks
                         Authority, 1989-2002
                       * S Years as Tax Preparer and Business
                         Consultant with The Tax Shelter. 2000-
                         2008 (part time and full time)
                       * One year as Quickbooks Class Instructor
                         for Competitor 1
                       * Presently a Quickbooks Instructor for the
                         Isla Training Center

Ed Cruz, Instructor    * One year of Web Development with
                         IT&E Overseas, hie.
                       * Three years as Web Architect with
                         ByDesign Identity Mgt.
                       * Six years as IT Specialist/Webmaster
                         with Bank of Guam.
                       * One Year as IT Administrator with
                         Graphic Center
                       * Microsoft Office Training Instructor for
                         Isla Training Center since July 2007

Sandra Paulino,        * Seven years as Administrative Assistant
Training                 and Program Coordinator with the Dept.
Coordinator              of Public Health and Social Services
                         handling federal grants and programs
                       * 10 Years as Administrative Sendees
                         Officer with Guam Environmental
                         Protection Agency handling all fiscal,
                         personnel, and administrative aspects.
                       * Center Manager for Isla Training Center
                         since July 2007

                                     Credentials

James Paulino,         * B.A. in Finance and Accounting,
Instructor               University of Oregon. 1986
                       * Licensed Real Estate Broker, 2007

Ed Cruz, Instructor    * B. S. in Information Teclmology,
                         University of Phoenix. 2008
                       * Microsoft Certified Systems
                         Administrator (MCSA)
                       * Microsoft Certified Professional
                         (MCP)
                       * Comptia Security +
                       * Comptia A+
                       * Certified Data Cabling Installer -
                         Category 5 (CDCI)

Sandra Paulino,        * M.B.A., University of Guam. May
Training                 2008
Coordinator            * B.S. in Public Administration.
                         University of Guam. 1993
                       * Extensive training and experience in
                         grants management

Table 3: Isla's Monthly Costs, June-December 2007

Explicit Costs=$9,446
Payment to instructors                                  $3,600
Rent                                                    $1,450
Utilities                                                 $505
Administrative                                          $1,500
Advertising                                               $852
Other                                                     $205
Computer Hardware and Software                          $1,209
Computer Supplies                                        $ 125
Implicit Costs, also known as Opportunity Costs=     $4,149.67
Forgone interest on business owners' savings           $ 66.67
Training coordinator's forgone salary                   $4,083
Total cost                                          $13,595.67
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Article Details
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Title Annotation:SPECIAL NOTE ISSUE: SPECIAL ISSUE 1
Author:Ruane, Maria Claret M.; Paulino, Sandra
Publication:Journal of the International Academy for Case Studies
Article Type:Case study
Geographic Code:1U0GU
Date:Dec 15, 2009
Words:3349
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